The Latest Cases and Legislative Changes You need to Know when Drafting Contracts.

1. The Latest Cases and Legislative Changes You need to Know when Drafting Contracts. Alicia Hill, Principal, Corporate Recovery and Dispute Resolution3 September 2015

2. Outline Recent Cases: • Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd • Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • Alameddine v Glenworth Valley Horse Riding Pty Ltd • GroconConstructors (Vic) Pty Ltd v Apn Df2 Project 2 Pty Ltd Legislative Developments: • Extension of Unfair Contract Terms provisions to small business contracts

3. Recent cases Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd • Pre-emptive rights clause • The Court was asked to confirm whether: • the pre-emptive rights clause was sufficiently clear and certain to be capable of application; and • conditions placed in notices purporting to be a trigger of that clause complied with the drafted requirements in the clause.

4. Santos Offshore Pty Ltd v Apache Oil Australia [2015] WASC 242 Corporate Structure of Apache Group

5. Santos Offshore Pty Ltd v Apache Oil Australia [2015] WASC 242 • 12.3(A) For the purpose of this Clause 12.3, the term Acquired Party shall refer to the Party that is subject to a Change in Control and the term Acquiror shall refer to the Party or third party proposing to acquire Control from a Change in Control. • 12.3(B) Any Change in Control of a Party shall be subject to the following procedure. • 12.3(C) Once the final terms and conditions of a Change in Control have been fully negotiated, the Acquired Party shall disclose the final terms and conditions as are relevant to its Participating Interest, including the date of the Change in Control, and its determination of the Cash Value of that Participating Interest in a notice to the other Parties. The notice shall be accompanied by a copy of all instruments or relevant portions of instruments establishing such terms and conditions and which will constitute, subject to this Clause 12.3, an offer to sell such Party’s Participating Interest to the other Parties. • 12.3(F) Each other Party shall have a right to acquire the Participating Interest of the Acquired Party for the Cash Value on the equivalent terms and conditions set out in the Clause 12.3(C) notice for cash. No Party may acquire the Acquired Party’s Participating Interest pursuant to this Clause 12.3, unless and until completion of the Change in Control. If, for any reason, the Change in Control agreement terminates without completion, the other Parties’ rights to acquire the Participating Interest under this Clause shall also terminate.

6. Santos Offshore Pty Ltd v Apache Oil Australia [2015] WASC 242 Purchase of 100% of share capital Santos Viraciti Notice pursuant to clause 12.3 of the Spar JOA

7. Recent cases Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd • The dispute revolved around the proper construction of clause 12.3 in the Spar JOA. • Need for caution in adopting a construction which would restrict the operation of pre-emptive rights clauses or permit their application to be avoided.

8. Recent cases Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd • Pritchard J held that clause 12.3 was not uncertain, as the words she found had a clear meaning. • That clause clearly outlines the means for identifying the terms and conditions of a change in control transaction agreement which will constitute the offer to sell the acquired party’s Participating Interest to the other parties to the Spar JOA.

9. Recent cases Santos Offshore Pty Ltd v Apache Oil Australia Pty Ltd • Pritchard J then considered whether each of the conditions challenged by Santos in the clause 12.3 notice failed to comply with the requirements of that clause. • Her Honour found that certain conditions failed to comply with the requirements for clause 12.3. • Pritchard J made declarations that each of the notices were wholly invalid and that the invalid conditions could not be severed from the notices.

10. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • Contract formation case. • The Court was asked to consider whether a binding agreement for lease after an exchange of communications despite no formal documentation being signed by the parties.

11. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • By a written agreement dated 6 August 2003, Vantage Systems Pty Ltd (Vantage) leased part of an office building from Gamol Pty Ltd (Gamol) for a period of three years, commencing 1 July 2003. • Gamol also granted Vantage a licence to use six car bays on the property. • Vantage sub-leased part of the premises to a third party. • Vantage exercised its option to renew the lease.

12. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • In December 2007, Priolo Corporations Pty Ltd (Priolo) became the registered proprietor of the premises. • In May 2009, there were discussions, Priolo’s agent sent Vantage a proposal for a new lease. • On 4 June 2009, Priolo’s agent emailed Vantage attaching a revised proposal for a new lease stating ‘can you please confirm in writing that this proposal is acceptable to Vantage and we will arrange for [Priolo’s] solicitors to prepare the draft documentation.’

13. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • The trial judge concluded that: • Prioloand Vantage intended to entered into a binding agreement for lease by the acceptance of the revised proposal by Vantage and • there was a sufficient meeting of minds for there to be a binding agreement for lease.

14. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd • The Court of Appeal was asked to determine did the parties intend that, upon Vantage accepting the revised proposal, they would be bound immediately and exclusively by the express and any implied terms of the revised proposal, while expecting to execute a formal lease and licence agreements in substitution for the earlier agreement which would contain, by consensus and after negotiation, additional terms.

15. Recent cases Vantage Systems Pty Ltd v Priolo Corporations Pty Ltd Buss JJA held, on an objective assessment, that upon Vantage accepting the revised proposal the parties intended that: • there should be a concluded and binding agreement to lease the Premises and take a licence in respect of six car bays; • the parties would be bound immediately and exclusively by the express and any implied terms of the revised proposal…

16. Recent cases Alameddine v Glenworth Valley Horse Riding Pty Ltd • Exclusion clause • This Court was asked to consider whether an exclusion clause had been sufficiently well drafted to preclude liability for personal injury incurred after participation in an inherently dangerous activity.

17. Recent cases Alameddine v Glenworth Valley Horse Riding Pty Ltd • The appellant, an 11 year old girl, was injured when she fell off her quad bike at the respondents’ recreational facility at Glenworth Valley in New South Wales. • The injury occurred while the appellant was being led around a “purpose built quad biking track” by an instructor employed by the respondents. • The appellant commenced proceedings claiming that the respondents were liable to her in negligence and for their non-compliance with the guarantees relating to the supply of services under the ACL.

18. Recent Cases “A. As a potential participant, you acknowledge and accept that recreational activities including but not limited to abseiling, kayaking, quad biking and other adventure activities (‘the activity’) constitute a dangerous recreational activity pursuant to the Civil Liability Act, 2002 and that participation in the activity involves a significant risk of physical harm or personal injury including permanent disability and/or death. Any such injury may result not only from your actions including physical exertion but also from the action, omission or negligence of others. B. You further agree that GVOA including its officers, employees or agents shall not be liable to any person whether in contract, tort, under statute or otherwise for any injury, loss, damage, death, economic loss whatsoever suffered by you, whether consequential, direct or indirect, caused by or connected with your participation in the activity (collectively referred to as the ‘harm’)”.

19. Recent cases Alameddine v Glenworth Valley Horse Riding Pty Ltd • On appeal, the Court held that the exclusion clauses were void. The respondents were liable to pay the appellant compensation under the ACL as a result of their failure to comply with the guarantee given to the appellant that they would perform their services with due care and skill. • The Court also reiterated that exclusion clauses are not ordinarily construed so as to extend to the consequences of the defendant’s negligence unless the clause refers to that basis of liability.

20. Recent cases Alameddine v Glenworth Valley Horse Riding Pty Ltd • A sub-issue in this case was when the contract was made. • The two options were when the appellant’s mother booked and paid for the activity or when they attended the facility and signed the form. • The Court held the contract was made when the appellant’s mother booked and paid for the activity. Therefore, the warning sign that was evident to them on their arrival at the facility did not form part of the contract, which had already been made.

21. Recent cases GroconConstructors (Vic) P/L v Apn Df2 Project 2 P/L • Definition interpretation • The Court was asked to consider the meaning of the word payable in a definition in the contract to identify which of the parties had breached a design and construct contract.

22. Recent cases Grocon Constructors (Vic) P/L v Apn Df2 Project 2 P/L • Grocon refused to provide certain records to APN to enable APN to verify costs actually paid by Grocon in completing the Project. • APN considered this a breach of the terms of the building contract and refused to pay Grocon’s invoices until the information was provided to determine if the amounts claimed were actual payments made or yet to be made and thus, on their interpretation, not yet payable.

23. Recent cases Grocon Constructors (Vic) P/L v Apn Df2 Project 2 P/L One of the fundamental issues on appeal was whether the definition of ‘Actual Trade Costs’ contained in the design and construct contract being “actual traded, supplier, consultant or subcontract costs payable” meant an amount that was to be paid or actually “paid“.

24. Recent cases Grocon Constructors (Vic) P/L v Apn Df2 Project 2 P/L • The Court rejected the trial judge’s finding that “payable” should be construed to mean “paid” and found that the phrase “actual trade, supplier, consultant or subcontract cost payable by [Grocon]” meant costs incurred by Grocon irrespective of whether the costs have actually been paid.

25. Legislative Developments UCT Historical development • Consumer UCT protections came into effect 1 July 2010 • Proposal to extend to small business contracts - not new • Political promise to implement these reforms • States have already agreed to reforms – April 2015 • Draft legislation released for consultation • Amendments to: • Australian and Securities Commission Act 2001 • Competition and Consumer Act 2010 - ACL

26. Legislative Developments Proposed new law A term of a small business contract is void if: • The contract is a standard form contract; and • The term is unfair.

27. Legislative Developments What is a small business contract? • Contract for supply of goods or services or a sale or grant of an interest in land ( ACL);AND • At the time contract entered into one of parties is a “small business”; AND • Either of the following applies: • Contract up to 12 months duration - upfront price payable under contract does not exceed $100,000; OR • Contract more than 12 months – upfront price not exceed $250,000

28. Legislative Developments What is upfront price? • EM - refers to transaction value thresholds • Existing S26(2) of ACL: the consideration that: • (a) is provided or to be provided for the supply, sale or grant under the contract; and • (b) is disclosed at or before the time the contract was entered into but does not include any other consideration that is contingent on the occurrence or non occurrence of a particular event

29. Legislative Developments What is a small business? • Test: Will be a small business if the business employs fewer than 20 persons • A casual employee is not counted unless employed on a regular or systemic basis • Issues: • Intent: Contracting party / what about related entities in a group – not designed to protect listed public companies • Submissions about the test – may slightly change

30. Legislative Developments What is a standard form contract? • Not defined – typically take it or leave it contracts • Courts may take into account matters that it considers relevant • Courts must take into account: • Whether one party has all/most of bargaining power • Whether contract prepared by one party before discussions commenced about transaction • Whether one party had to either accept it or reject it in the form it was presented

31. Legislative Developments What is a standard form contract? • Whether the other party was given a real opportunity to negotiate the terms • Whether the contract takes into account specific characteristics of the other party or that transaction • Other matters prescribed by regulation Onus: Is reversed – must produce evidence to rebut the presumption that it is a standard form contract Important: Evidence to substantiate and attitude to negotiations may change

32. Legislative Developments When will a term be unfair? Test: A term is unfair if: • It would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and • It is not reasonably necessary to protect the legitimate interests of the party; and • The term would cause detriment if it were relied upon Effect: Term is void ab initio as if it never existed Onus: Reversed – evidence to rebut presumption and show clause is reasonable to protect your legitimate commercial interests

33. Legislative Developments Who can seek relief? • Party to the small business contract • ACCC /ASIC • Possible exclusions to whom it does not apply or who cannot seek to apply: • Public companies and subsidiaries • Businesses conducted by State or Territory or under authority of the Commonwealth

34. Legislative Developments What terms are exempt? • Terms that relate to: • upfront price • subject matter • Terms that give effect to the subject matter e.g. acquire a product on the internet and the specified method of delivery is by courier - cannot challenge method of delivery • Terms that are required or permitted by law: Franchising Code clauses – dispute, termination, breach, cooling off

35. Questions? For more information, please contact: Alicia Hill, Principal Corporate Recovery and Dispute Resolution Phone: (07) 3231 0607 ahill@mcw.com.au